Why you should care

Spooked by global uncertainty, German exports are struggling, hobbling Europe’s largest economy.

By Claire Jones and Valentina Romei

The Daily DoseJAN 25 2019

Alexander Hinterkopf, a maker of digital industrial printers, built his business through regular trips from the company’s German headquarters to big markets around the world. But in recent months his travels have been less fruitful.

“The environment can be summed up in one word — uncertainty,” says the Baden-Württemberg-based businessman. “Uncertainty is never a good thing in business, it means you always postpone decisions. Since the summer, I’ve been to China three times, and each time customers come up with another reason to postpone.”

After a decade of boom, a darkening political climate is beginning to cloud the international economic outlook. The global economy is forecast to grow less than 3 percent for the first time since 2009 in 2019, according to Consensus Economics, which polls economists worldwide. Germany, the world’s fourth-largest economy, with an export machine of 1.6 trillion euros a year, is among those most exposed.

“To invest in a big new machine … businesses need to be able to tell themselves a story about how good the economy is going to be over the next two to three years,” says Hinterkopf. “Instead we have a trade war between the world’s two biggest powers. And Europe has its own problems.”

People are beginning to realize it’s not just cars, that export demand in general has weakened

Isabel Schnabel, financial economics professor, Bonn University

His concerns are shared by others in the country’s Mittelstand of small and midsize companies, the bedrock of its economy.

“We are affected by the high punitive tariffs being imposed in the trade war between the U.S. and China. Brexit concerns us too,” says Marc-Sven Mengis, CEO of automotive systems manufacturer Fischer, also based in Baden-Württemberg. “When the global economy cools down, we notice.”

A poll of German business confidence by Ifo, the Munich-based think tank, fell to its lowest level since 2016 in December.

“[Companies] are seeing a reluctance to order new machines from all over the world,” says Ulrich Ackermann, managing director for foreign trade at VDMA, the trade body representing machine manufacturers. “A company only invests if they are feeling optimistic about the future and we are coming to the end of the economic cycle after 10 years of growth.”

German exports of goods and services make up a higher proportion of gross domestic product than in any other big economy, at 47.2 percent. The most recent figures show trade is providing the largest drag on GDP since 2010, and the weakness in exports could push Germany into a technical recession — defined as two quarters of negative growth.

In the third quarter of 2018, the country’s economy shrank for the first time since 2015. Many economists thought that would prove a temporary blip, blaming delays at automakers in meeting new European Union emissions standards. But recent purchasing managers’ indexes — a frequently used bellwether of what will happen to GDP — indicate there will be little sign of improvement in the fourth quarter. The index for German manufacturing exports hit its lowest level since 2012 in December.

“People are beginning to realize it’s not just cars, that export demand, in general, has weakened,” says Isabel Schnabel, a professor of financial economics at Bonn University and a member of the Council of Economic Experts, which advises the German government.

Schnabel thinks German growth will remain above 1 percent in 2019, but that is well below the level in recent years. “Growth worldwide is less dynamic, but it also has to do with capacity constraints in the German economy,” she says. “There had to be a slowdown in growth anyway due to a lack of potential to continue growing at this pace after so many strong years.”

Companies’ main fear remains the possibility of an intensification of the U.S.-China trade spat. “With China we need a clear solution; the danger is that the tariffs imposed are much too big,” says Hinterkopf. “Ten percent [tariffs] was already a painful hurdle; at 25 percent no one will buy anything and things will come to a complete standstill.”

The threat of a hard Brexit is also causing concern. A senior manager at a German manufacturer of high-end household goods says: “No one really believes the U.K. will crash out of the EU with no deal.… There is a deep-rooted belief that in the end U.K. politicians will put the economy first. In other words, we are in complete denial.”

Companies are also increasingly concerned about fractiousness within the eurozone, fueled by the yellow vest protests in France and the potential for a clash between the markets and the populist government in Rome.

“France and Italy could also become problematic — especially Italy,” says Jürgen Polzin, an economist at ZVEI, an organization representing manufacturers of electrical and electronic products.

What German manufacturers need most are global leaders to take decisions and provide clarity, Hinterkopf says. “We need [Donald] Trump to tell us what he wants, then the world will be better.”

But Hinterkopf is optimistic that any slowdown will be short-lived. “I am stepping on the accelerator because I think by the spring things will be better,” he says. “What we have to remember is that no one wants this standstill. People want to buy things, traders want to sell them and we want to make them.”